Question

Ethics: Compilation Facts:

• A Chicago area manufacturing company (“JKL”) has 2 unrelated owners. The CPA firm (“Flexible”) for the manufacturing company prepares annual compiled financial statements and corporate tax returns (1120S). In addition, Flexible prepares the personal income tax returns for one of the owners – a different tax accountant prepares the personal income tax returns for the other owner. The Company has a December 31st year end.

• Toward the end of February each year, there is an annual meeting in the western suburbs, with the following in attendance: the 2 owners of JKL, Flexible’s CPA Partner, the tax accountant for the other owner, and pension consultants.

• In anticipation of the meeting, Flexible prepares and distributes draft financial statements, and a year to date General Ledger; everything is complete except the amount of any pension accrual and the final amount of inventory.

• The purposes of the meeting are to determine: 1. the pension accrual 2. the desired taxable income for the year 3. the amount of inventory necessary to bring taxable income to the desired level (achieved through a debit or credit to inventory with an offsetting debit or credit to cost of goods sold).

Required: For the situation described above, please answer the following two questions:

1. What are the business ethical issues? 2. What are the professional ethical issues for Flexible’s CPA Partner?

Answer 1

Ethical issues in business encompass a wide array of areas within an organization’s ethical standards. Fundamental ethical issues in business include promoting conduct based on integrity and trust, but more complex issues include accommodating diversity, empathetic decision-making, and compliance and governance that is consistent with the organization’s core values

6 Ethical Issues in Business

1. Harassment and Discrimination in the Workplace

2. Health and Safety in the Workplace

3. Whistleblowing or Social Media Rants

4. Ethics in Accounting Practices

5. Nondisclosure and Corporate Espionage

6. Technology and Privacy Practices

Details on Ethics in Accounting Practice

Any organization must maintain accurate bookkeeping practices. “Cooking the books”, and otherwise conducting unethical accounting practices, is a serious concern for organizations, especially in publicly traded companies.

An infamous example of this was the 2001 scandal with American oil giant Enron, which was exposed for inaccurately reporting its financial statements for years, with its accounting firm Arthur Andersen signing off on statements despite them being incorrect. The deception affected stockholder prices, and public shareholders lost over $25 billion because of this ethics violation. Both companies eventually went out of business, and although the accounting firm only had a small portion of its employees working with Enron, the firm’s closure resulted in 85,000 jobs lost.

In response to this case, as well as other major corporate scandals, the U.S. Federal Government established the Sarbanes-Oxley Act in 2002, which mandates new financial reporting requirements meant to protect consumers and shareholders. Even small privately held companies must keep accurate financial records to pay appropriate taxes and employee profit-sharing, or to attract business partners and investments.  

Ethical issues faced by Flexible CPA Partner :

Pressure From Management
The burden for public companies to succeed at high levels may place undue stress and pressure on accountants creating balance sheets and financial statements. The ethical issue for these accountants becomes maintaining true reporting of company assets, liabilities and profits without giving in to the pressure placed on them by management or corporate officers. Unethical accountants could easily alter company financial records and maneuver numbers to paint false pictures of company successes. This may lead to short-term prosperity, but altered financial records will ultimately spell the downfall of companies when the Securities and Exchange Commission discovers the fraud.. Since Flexible firms people also prepare the personal income tax returns for one of the owners, there is a certain degree of conflict of interest..

The Effects of Greed
Greed in the business and finance world leads to shaving ethical boundaries and stepping around safeguards in the name of making more money. An accountant can never let the desire to earn a better living and acquire more possessions get in the way of ensuring that she follows ethical guidelines for financial reporting. An accountant who keeps her eyes on her own bank account more than on her company’s balance sheet becomes a liability to the company and may cause real accounting violations, resulting in sanctions from the SEC.

Omission of Financial Records
A corporate officer or other executive may ask an accountant to omit or leave out certain financial figures from a balance sheet that may paint the business in a bad light to the public and investors. Omission may not seem like a significant breach of accounting ethics to an accountant because it does not involve direct manipulation of numbers or records. This is precisely why an accountant must remain ethically vigilant to avoid falling into such a trap.